A Dangerous Combination: Revisiting the Paradise Papers, the Wealthy, and Populism

Exhaustive media coverage of Donald Trump’s large, highly selective tax cut has highlighted a regrettable aspect of the Paradise Papers, which detailed how some of the planet’s richest individuals and companies avoided payment of billions of dollars in tax by using offshore tax havens.

Released last November, the Paradise Papers involved a trove of millions of leaked documents, which tracked — chapter and verse — the tax affairs of wealthy companies, business leaders and celebrities, ranging from close associates of the US President, to big name companies like Nike and Apple.

And yet the Paradise Papers disappeared rather too quickly from the headlines. Except for the consortium that broke the story, media gave them partisan, somewhat short shrift, making those outlets look like part of “the elites”, as the populists would have it, who do not care about the plight of those who are not wealthy.

Yet taken together, the tax cut and the Paradise Papers could still do vast electoral damage to the confidence-tricksters of populism, as Trump’s mythical “forgotten people” realize that those who claim to speak for them are in fact those who exploit them the most.

The names of 13 of Trump’s close associates appeared in the Paradise Papers, next to those of the ultra-rich and their companies — some of whom are set to benefit from the President’s all-or-nothing, Christmas tax show — part-populist stunt, part-blatant sop to the rich.

Mr Average, that rare bird in the street, may not even know of the Paradise Papers, at least not directly. But electoral results in Alabama and Virginia suggest Bill Clinton’s “It’s the economy stupid”, may be morphing into a kind of “We’re not so stupid, Mr President”. An economic recovery favoring the “haves” in the big metropolitan areas will likely further add to the dynamic, as even Trump’s supporters start to grow frustrated with the false promises of populism.

Have some forgotten that the swaggering, self-proclaiming hero of the working man, has 24-carat gold fixtures in his private plane? Perhaps. But for those who push the door, it opens onto luxury and privilege rarely seen in the history of the American Presidency, the rich illusion of Trump Tower, top-end real estate, and the ironic unreality of reality television. Some of this may have initially been image-positive for the president (the name recognition of “The Apprentice”, for example), but the times are changing, as the unpopularity in polling of the tax cut testifies.

Forbes reports the cumulative personal wealth of the Trump Administration is $4.3 billion, 15 times that of the group around George W. Bush. Trump is the first US President since Gerald Ford in 1976 to refuse to release his tax returns saying, when accused of not paying federal taxes for 20 years, “That makes me intelligent”. The Paradise Papers confirm that his cabinet is equally “intelligent”, except that their tax avoidance is off-shore, in contrast to Trump the stay-at-home gamer, with 400 companies in low-tax Delaware.

For how much longer this level of hypocrisy? Economic growth statistics and the small sop middle-class tax cut — $930 next year, compared to $51,140 for the top 1% says the independent US Tax Policy Centre — may not be enough to put a lid on a backlash.

It is unsettling, not to say a gargantuan political faux pas, that those who relentlessly argue the benefits of global trade and the open economy failed to express their outrage upon release of the Paradise Papers. Instead, they were outrageously conditional, skewering themselves on the distinction between tax avoidance and tax evasion. Those who call on the rust belt to “retrain” and “adapt” — to be more generally “flexible” — should have been the most ardent in calling out the fundamental injustice of tax evasion and avoidance, as well as big tax cuts for the rich. Instead their circumspection made them look suspect, open yet again to the populists’ claim that the elites, their “experts” and protectors, play by a separate set of rules.

Revisiting Paradise

Two months after the release of the Paradise Papers, the traces of at least three broad-based shocks still hang in the air: the large financial sums involved; the household names attached; and the minimization of the revelations by some international authorities and tax experts, part of whose brief should be to stamp out tax avoidance.

Numerous critics called the catch, after a deep-sea trawl across the planet’s blue-water tax havens, legally “light”. They claimed a distinction between tax evasion, which is against the law, and tax avoidance (by “optimizing” one’s tax profile), which is not. Most of those caught in the dragnet of the Paradise Papers — after a massive leak to Munich’s Süddeutsche Zeitung newspaper — purportedly did nothing illegal.

That is a highly questionable assertion that will doubtless be tested in the courts in the months and years ahead. For example, miraculously transforming joy-riding private planes into business jets by landing them on the Isle of Man — thus avoiding sales tax, looks prima facie like tax fraud. Similarly, it’s hard to see the public interest argument in multinationals holding semi-secret affiliates on the Cayman Islands, where the corporate tax-rate is 0%.

In moral terms? Well, it was all “bof” — a bit “blah-blah” — as one French commentator described it. After all, we’d all seek to “optimize” our tax return using indecently expensive tax lawyers and accountants if we had the means. Right? Well, no. Some of us see paying tax as a necessary citizen act; others take solace in an anthropomorphic or even religious aspect.

Paying tax is central to what is sometimes called the democratic or citizen contract. It’s about belonging to a community and the notion of community as nation. If the rich, corporations and especially the big tech American Gafam (Apple, Alphabet Inc., Facebook, Amazon, and Microsoft), don’t pay their taxes, budget shortfalls on essential services, hospitals, schools and infrastructure have to be met by the rest of us. Similarly, ordinary companies that hire locally pay charges on that employment. Where would society be if the citizenry consented en masse not to pay tax (“If the rich don’t pay, why should I?”). The only probable answer is flailing in the dust.

Yet an elitist argument circling the Paradise Papers has been that if we had only bothered to follow developments more closely, we would know that substantial progress has been made. Under pressure from the non-legislating G20 and OECD club of rich nations, bank secrecy has been wound back in places like Switzerland and Singapore. In December, the European Union established a tax havens blacklist (and subsidiary grey list) — an image-besmirching step for the countries and territories involved but limited, complicated, and toothless. None of the Isle of Man, Jersey, Bermuda, or the British Virgin Islands are on it.

According to the Financial Times newspaper, since the Global Financial Crisis “an international transparency drive has resulted in the automatic exchange of tax data by more than 100 countries” — except that the US has not joined in. “Offshore centers”, as the FT calls them with winning neutrality, “have shaken off, at least in part, their reputation for secrecy”. The OECD, meantime, is “largely satisfied” with the progress achieved.

By contrast, here’s how Munich’s Süddeutsche Zeitung, quantified the leak of 14 million documents, most from offshore tax lawyers Appleby:

Multinational corporations have parked a total of 7.9 trillion euros in the world’s tax havens. This is enough money to feed every person on the planet suffering from hunger for more than 61 years or send all children in the world with no access to education to schools that meet German standards for 4 1/2 years.

Tax havens used to be perceived as an anomaly of the world economy — like a few naughty kids at the back of the class who hide their stolen wares. We now know that the problem is endemic. There are 30,000 letterbox companies on the Isle of Man, three-quarters of them “empty shells”, according to French daily Le Monde. The Cayman Islands, with 50,000 residents, plays home to some 80,000 registered companies, 19,000 of them housed — with reportedly no actual inhabitants — in the single, two-story building, Ugland House.

That big companies and the ultra-rich are deliberately avoiding tax by aggressively using tax schemes, cynically seeking the mere appearance of legality, is a scandal and an outrage by any other name. No one should have the right to exonerate themselves from the general interest or from common or shared responsibilities, certainly not via a closed or protected system that opts them out. The principle of the “general interest” is hard to define in any pluralist society, but comparably simple where tax is concerned: companies should pay tax where they add value. If the advent of big tech and the primacy of intangible assets has limited the effectiveness of traditional territorial taxes, then the notion of structured, multi-state imposition must be rigorously pursued. The incentive for global action is surely that governments stand to recuperate the vast amounts of money — our money, as tax-payers — that they are currently losing.

The Paradise Papers made clear that much more international coordination is needed, not only to shut down tax havens but also to stop the encouragement of tax avoidance by different treatment of investments, dividends, royalties, interest payments, and the levy of Value Added Tax. In the face of only limited progress in the past 10 years, there is plenty of hard work still to be done on the long, arduous, but ultimately necessary road towards internationally-mandated tax rules.

In part at least, it is the discourse around the need to reduce fiscal constraints on big companies that has made electorates hostile in the US, France, Germany, and Brexiting Britain. Trump’s blind tax hack merely confirms an international trend. Since 1981, according to the OECD, average corporation and dividend income tax has been cut by almost half; top personal income tax by a quarter; and taxes on wealth and inheritance reduced or abolished in several OECD countries.

With populist sharks in the water, miscuing on the tax cut while minimizing the scale and significance of the Paradise Papers risks worsening the long-term carnage that Trump and the populists are already doing.